Review Questions

1.
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What is meant by a worker's reservation wage? What factors might lead to an increase in its value?
2.
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Given the optimal reservation wage, w*, what is the probability that an unemployed worker will accept the very next offer he or she receives?
3.
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Models of equilibrium wage dispersion require that workers' search strategies are optimal (given the wage distribution) and that firms optimally set their wage offers (given workers' search behavior). Why are both of these conditions necessary?
4.
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Explain what is meant by the Diamond paradox and why it precludes a (nontrivial) distribution of wages in the basic sequential-search model.
5.
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Outline some of the methods that unemployed workers can use to find work. What are the benefits and drawbacks of these methods?

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